Dave Ramsey is a businessman, author, and radio personality who specializes in the area of personal finance. He is known for his “debt-free platform,” which forms the foundation of all the financial advice he gives.
After counseling members of his own church, Dave Ramsey began marketing his books and classes through churches as well as traditional media outlets. Dave Ramsey gives people some basic steps to follow in order to get debt-free. Once they do so, he encourages them to never take out any type of debt again.
As a result, he generally advises people to pay cash for their home and not to take out any type of mortgage. Therefore, it is not surprising that Dave Ramsey would not recommend a home equity loan or home equity line of credit (HELOC).
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Why Dave Ramsey Says You Shouldn’t Get a Home Equity Loan
Dave Ramsey advises his followers to avoid home equity loans and HELOCs. Although it might seem like home equity loans might make sense if homeowners are trying to quickly pay down credit card debt in their quest to become debt-free, he still does not recommend home equity debt.
Dave Ramsey says that home equity loans are too risky because borrowers could end up losing their homes. He also warns that home equity loans often have high interest rates, variable interest rates, and other forms of balloon payments that can make it hard for borrowers to make the payments.
Why Dave Ramsey May Be Wrong About Home Equity Loans
Although Dave Ramsey has a large following of fervent fans, most financial experts question a considerable amount of the advice he gives. Uniformly advising people against taking out a home equity loan is not responsible financial guidance.
Each borrower needs to consider how the home equity loan payments add to their overall debt burden, what they plan to do with the money from the loan or line of credit, and what other alternatives they may have.
Taking out a home equity loan or home equity line of credit may not be a good choice for everyone, but it is not a uniformly bad decision, as Dave Ramsey’s debt-free mantra may lead you to believe.
Most home equity loans and HELOCs do not have the high interest rates and unusual balloon payments that Dave Ramsey might lead people to believe are the norm. Interest rates on home equity loans may be fixed or variable rates and are generally just a little higher than mortgage interest rates.
In addition, borrowers may be able to deduct the interest they paid on their home equity loan or HELOC from their federal taxes. Prior to 2018, borrowers could deduct the interest payments from their federal taxes.
As of 2018, however, the IRS follows new regulations about mortgage interest deductions. Borrowers can only deduct the interest from home equity debt if they use the proceeds from the loan to substantially improve or renovate the property that serves as the collateral for the loan.
Are There Alternatives?
According to Dave Ramsey, people should not use home equity debt to help them get out of other forms of debt, such as credit card debt. Instead, he tends to suggest that people save money by eating ramen and buying a $500 car in order to have the money to pay off their outstanding debts.
The only other less drastic suggestion, however, would be to consider taking out an unsecured personal loan. This is still a form of debt, but borrowers don’t have to worry about losing their homes because they do not serve as collateral. As a result, the interest rates are much higher than home equity loan rates.